Emergency Fund & Deductible Snowball
A popular approach to paying off debt is something called the Debt Snowball. The idea is that you would make a list of your debts from lowest to highest and then begin to pay down debt starting with the smallest debt and working down the list. This is an excellent way to pay down debt when you need a little extra motivation to push you to achieve your debt payment goals. Those small wins along the way can help give one a sense of accomplishment and hopefully encourage follow-through.
Use the Snowball for Savings
I think this approach could be helpful with savings too! A widely used rule of thumb is that we should have an emergency fund that will cover 3-6 months of non-discretionary living expenses. These are expenses that are fixed and would have to be paid even in a situation where you have a loss of income. Think mortgage/rent, car notes, credit card bills, insurance (life, health, auto, home/renter's), food, taxes, and utilities.
Saving for a 3-6 month emergency can feel quite daunting, but maybe it doesn't have to. What if you built up your emergency fund using a snowball approach? You would start out by determining how much of an emergency fund you need - for now let's just say three months for a home with two or more working individuals and at least six months if there's just one breadwinner. Then you'll break it into bite-size chunks to help encourage the building of the emergency fund over time.
Example:
- Monthly Expenses: $2,000
- 3-Month Emergency Fund: $6,000
- 6-Month Emergency Fund: $12,000
In the example, above you have expenses of $2,000 a month which would mean a 3-month emergency fund is $6,000 and a 6-month emergency fund is $12,000.
The idea is that instead of focusing on the $12,000, you would focus on first saving enough to cover one month, then build on that to reach the two-month mark and then three, etc. Now it could take some time to build this up. You're not expected to fund this in 3-6 months, the additional money may not be there and it's okay. But over time you would be steadily building your rainy day fund up. The why? You want to be able to cover your monthly expenses if for some reason you no longer have an income or perhaps you have a deduction in your income. So now it looks a little something like this.
Slowly Building a 3 - 6 Month Emergency Fund
This approach gives you many opportunities to celebrate the small wins along the way. Focusing on a smaller amount could help drive you to fully fund the emergency fund. If you focus only on the big number - it's harder to not be a little discouraged.
Deductible Snowball
Maybe you like the idea of the emergency fund snowball, but you're still unsure if you can do it. First, I believe in you and I know that you can, but I have another idea. This may be a smaller snowball to consider. This snowball would be used to save for the deductibles in your life. Think auto insurance, health insurance, homeowner's insurance, etc. These are deductibles that you would be responsible for before your insurance kicks in. Of course, you don't want something to happen that would require the use of insurance, but things happen and it's better to be prepared than not.
How it works. Start by listing out the deductibles in your life from smallest to largest. Next, starting with the smallest amount you will begin to save to reach the goal. For example, you may have an auto insurance deductible of $500 and a health insurance deductible of $1000. You'll first save enough to cover the auto insurance deductible. Once you've saved that, pat yourself on the back and celebrate. 👏 Now start saving towards your health insurance deductible. You'll continue this snowball until you've saved enough to cover all the deductible categories. What a glorious feeling that would be! Understand this, I want nothing but the best for you, but by golly, if something were to happen - covering the deductibles would be one less thing to worry or stress about.
I provided two ideas that could help you begin to save. Both use a strategy typically used towards paying off debts, but instead, you're using it towards saving. You'd basically treat these savings goals as debts and build them up from smallest to largest.
✨Managing Money Like a Boss requires careful planning and preparation. It's about being proactive rather than reactive. Saving to pay for deductibles and building an emergency fund are big steps to building and protecting your financial future!✨